coverage for the vendor product or service is available and that the companys financial exposure to the vendor is minimized or eliminated.

For well-established, competitive vendor marketplaces, ensuring adequate coverage in the case of vendor failure should be a relatively straightforward process of assessing competitive offerings and estimating the associated switching costs. For vendors providing highly specialized niche products or services, the vendor manager may have to conduct additional research to find alternative products, approaches, or workarounds. Often, the effort of conducting this research can be shared among several customers who coordinate through the informal information-sharing groups.

The financial exposure to a vendor can come from a variety of sources. Prepaid or partially paid orders for equipment or products, prepaid or currently due maintenance fees, or other contractually obligated sums are common instances. We have seen many companies victimized by vendors that file bankruptcy while significant receivables have been paid by customers in advance of product or service delivery. Not only is delivery of the product delayed, but the monies spent to acquire the product are usually lost forever. The vendor manager should work with the CFO, finance department, or firm senior management to minimize the risks of lost capital and work with the vendor to ensure that contractually obligated amounts due result in actual services received by the client. In extreme cases, the company must halt payment to the vendor and file a lawsuit to line up for restitution when the vendor refuses to refund for services not performed. Many times, the filing of the lawsuit will provide leverage-the vendor often cannot raise money or proceed with any restructuring until the suit is settled, which provides motivation for the vendor to step to the negotiating table.

In one client situation, a worried vendor manager consulted us about the quarterly maintenance fee due to a product vendor. While not concerned with the stability of the product, which was operating properly, the manager was worried that additional money invested in maintenance fees would be lost if the vendor continued to struggle. Careful research indicated that the vendor was indeed in serious trouble, and the client delayed the $100,000 maintenance payment based on various vendor contract breaches. One month later, the vendor filed bankruptcy, leaving no hope of additional product development or support. The impact of $100,000 spent for services that would never be delivered would have been devastating for the financial position of this particular client.

In every case, the vendor manager should ensure that the firm senior managers are fully informed of the companys operational risk and financial exposure because of troubled vendors. The senior management team can be instrumental in helping reduce the risk and can help the vendor manager manage the advance planning and alternative brainstorming needed to minimize the potential risks.

Vendor Selection

This section outlines the process for selection of major outside service and product providers and the subsequent management of the vendors. The list of external vendors used by even a small firm is often lengthy. Vendors provide products and services across a wide variety of categories, as outlined in Exhibit 16.1. Within a category, multiple vendors may be used by a larger professional services firm.

The selection approach defined here is an abbreviated version of a full-fledged, comprehensive methodology and should be adequate for most professional services firm vendor selection processes. For an overview of the exhaustive selection process for a large-scale vendor, particularly for IT, we suggest reading The Executives Guide to Information Technology (Wiley, 2003). Chapter 10 covers the selection process topic in detail. As with all other frameworks described in this book, common sense should prevail, and the applicable portions of the approach should be applied to the specific situation at hand.

The successful selection of vendors plays a critical part in determining the overall success of the professional services firm and, as important, the ease with which the firm achieves success. Successful vendor selections can be complex and lengthy processes that require the collection and analysis of significant amounts of information, particularly for telecommunications and systems vendors. Well-thought-out vendor choices and solid vendors who behave as partners can ease the work of the vendor manager and the firm internal and professional staff considerably. Conversely, poor vendor selection can hamstring the organization with constant firefighting, failed initiatives, and angry staff and customers. Because outside vendors are generally a large source of expenditure for the professional services firm, the vendor manager cannot afford to ignore their proper selection and management.

Vendor interests and incentives, unfortunately, are not always precisely aligned with those of the vendor manager. While client satisfaction is a part of the equation for vendors, so are other factors such as product advancement, profitability, sales commission, quarterly revenue, and market penetration. A vendor salespersons natural role is that of an advocate for his or her product or service. This means that to be most productive for the firm, the vendor manager must supervise and actively manage the delivery of services and products on an ongoing basis to ensure that vendor delivery and execution are consistent with the expectations and goals of the organization. Picking the vendors on which to rely can be a risky proposition. The selection process can go awry, wasting significant dollars, disrupting the business, and ending careers for vendor managers.

In spite of the criticality and risk associated with vendor selection, experience has shown that vendor managers are at a significant disadvantage in the vendor process, particularly vendor selection. A vendor manager may

manage a selection process for a specific service or product a handful of times in his or her career, whereas his or her counterparts on the vendor side are generally senior-level sales professionals who close multiple deals each year. This puts the vendor manager at a distinct disadvantage to the vendor, from an experience standpoint alone.

Compounding the issue is the fact that once a vendor selection is complete, it is generally difficult to undo. If it turns out that better, more appropriate vendors are available, often the sunk cost and previously committed contractual obligations prevent their being engaged. Thus, the opportunity to replace a vendor may appear only once every few years, at best. This means that vendor selection can be a one-way street with very few turning off points and that vendor selection and management are a critical part of the successful vendor managers toolkit.

Vendor managers should have a good plan for the activities associated with vendor selection, including:

How to plan and execute a reasonably rigorous vendor selection process

An approach for generating target vendor lists for a given product or service

How to issue an effective request for proposal (RFP)

An understanding of the work required to complete due diligence on vendors and their products and services

How to produce meaningful feedback from vendor reference checks Vendor negotiation techniques that ensure best pricing and service

Overview of Methodology

Exhibit 16.6 shows an overview of the vendor selection methodology covered in this section. The methodology is intended to provide a reasonably detailed approach to the vendor selection process that will be applicable to most vendors required for a small-to-medium size professional services firm.

The process begins with the definition of scope for the product (or service) being acquired and proceeds through the identification of a team to support the selection process, the identification of potential vendors, the issuance of an RFP, the selection of vendor finalists, due diligence on the finalists, and final vendor pricing negotiations. Each of these steps is further detailed in the following section with a diagram highlighting the subtasks, required information, and outcome for each subtask.

Of critical importance throughout the selection process is to ensure that at all times the effort is being managed, organized, and driven by the vendor manager in charge. Top vendor sales professionals did not reach that status through passivity. Vendors are well practiced at the art of seducing the hapless vendor manager and will take on as much of the work and own or drive